Introduction

Arbitration can be less costly and more efficient than litigation. For this reason, businesses often prefer to arbitrate their disputes, and include arbitration provisions in their contracts. North Carolina courts generally enforce these provisions, citing the state’s “strong public policy favoring the settlement of disputes by arbitration.” Johnston Cnty. v. R.N. Rouse & Co., 331 N.C. 88, 91 (1992). Against this backdrop, the Court of Appeals’ recent decision not to enforce an arbitration agreement in Gay v. Saber Healthcare Grp., L.L.C., merits discussion.

Background

In Saber, the decedent’s representative signed several documents when the decedent was admitted to the defendants’ facility. These included an “Admission Agreement” and a “Resident and Facility Arbitration Agreement.” The former purported to reserve the right to a bench trial to resolve any dispute between the parties, while the latter purported to require arbitration.

Following the decedent’s death, the plaintiff (executor of the decedent’s estate) filed a complaint asserting various claims against the defendants. The defendants moved to compel arbitration based on the arbitration agreement. The plaintiff opposed the motion, contending that the parties never agreed to arbitrate.

The Trial Court Rejects the Arbitration Agreement

The trial court denied the motion to compel arbitration on grounds that no arbitration agreement existed between the parties. It reasoned that the admission and arbitration agreements were “internally conflicting”—the former purported to reserve the right to a bench trial, while the latter purported to require arbitration—and this conflict undermined any agreement to arbitrate.

In reaching its decision, the trial court made findings regarding the context in which the arbitration agreement was signed, including that:

• despite requesting a full version of the agreement, the decedent’s representative was provided only the signature page of the 3-page document at the time of signing;
• the signature page was provided in “very small print” on an iPad;
• the missing two pages of the agreement “were never available, shown, or explained” to the decedent’s representative at the time of signing; and
• the two missing pages were provided “amongst a mixed up package of documents…at a later time after [decedent] was residing at Defendant’s facility.”

(Slip op. at 5, 12-13).

A Divided Court of Appeals Affirms

On appeal, a divided Court of Appeals affirmed the trial court’s decision. The majority essentially adopted the trial court’s decision and affirmed based on the conflict between the admission agreement and arbitration agreement.

Judge Tyson issued a pointed dissent. Reading the majority and dissenting opinions together, several noteworthy ‘differences of opinion’ shed light on why the arbitration agreement was not enforced.

The Public Policy Favoring Arbitration – Just How “Strong” Is It?

First, the majority and dissent appeared to accord different weight to the state’s “strong public policy” favoring arbitration. The dissent highlighted this policy en route to finding that a valid arbitration agreement existed between the parties. The majority, on the other hand, focused its analysis elsewhere and did not cite the policy in its decision. This fundamental difference in outlook set the tone for the opinion.

The Parol Evidence Rule – To Apply or Not to Apply?

Next, the parties sharply disagreed over application of the parol evidence rule.

The dissent applied the rule and concluded, based solely on the terms stated on the signature page of the arbitration agreement, that an agreement to arbitrate existed between the parties. The dissent reasoned that the signature page included material language waiving a trial by judge or jury, along with the statement: “NOT A CONDITION OF ADMISSION – READ CAREFULLY.” (Slip op. (dissent) at 11 (emphasis in original)). Finding no ambiguity in the agreement, the dissent declined to consider extrinsic evidence to interpret it.

The majority, in contrast, concluded that the parol evidence rule did not apply because the dispute involved “issues of contract formation and ambiguity.” (Slip op. at 13, n.2 (citations omitted)). The majority thus looked to extrinsic evidence, namely the admission agreement and the context in which the agreements were signed (the small font, incomplete arbitration agreement, etc.), to interpret the arbitration agreement. It was by looking at this evidence that the majority ultimately found the (dispositive) conflict between the admission and arbitration agreements.

“Harmonizing” the Agreements – Was It possible?

Speaking of the conflict, the majority and dissent disagreed over whether there actually was one.

The dissent argued that the arbitration and admissions agreements could be “harmonized”—i.e., they could be read together such that both could be given effect. It endorsed the defendants’ proffered reading that “the bench trial clause in the Admission Agreement simply applies if Decedent’s authorized representative had rejected and declined to execute the Arbitration Agreement. Rejecting the Arbitration Agreement was without risk to Decedent’s admission to the Facility.” (Slip op. (dissent) at 11).

For support, the dissent cited two case in which arguably similar “conflicts” had been harmonized by the Court: Internet East, Inc. v. Duro Communications, Inc., 146 N.C. App. 401 (2001) (finding no conflict between agreement to arbitrate and forum selection clause providing North Carolina courts had “sole jurisdiction over any disputes”); and Johnston Cnty. v. R.N. Rouse & Co., 331 N.C. 88 (1992) (finding no conflict between choice-of-law and consent to jurisdiction clauses and arbitration provision in the same contract).

The majority rejected the defendants’ interpretation, while zeroing in on the fact that “the pages of the arbitration agreement providing all the details of the procedures for arbitration were not presented to [the decedent’s representative] when she signed its signature page.” In other words, the circumstances surrounding the signing of the agreement—which the dissent declined to consider under the parol evidence rule—played a large part in the majority’s decision not to enforce the arbitration provision.

The “Duty to Read”– To Apply or Not to Apply?

Finally, a contentious point arose with respect to the “duty to read.”

The dissent argued that the plaintiff should not be relieved of arbitration obligations on the basis that the decedent’s representative “did not read or ‘understand the purport of the writing’ when she could have informed herself and failed to do so, or simply have refused to sign the Arbitration Agreement without jeopardizing her mother’s admission to the Facility.” (Slip op. (dissent) at 7) (quotations omitted).

The majority countered that the decedent’s representative had requested but was not provided a full copy of the arbitration agreement at the time of signing. “Thus, this case is not one in which a party had constructive notice of and opportunity to review a contractual provision from which they seek relief.” (Slip op. at 13).

Worth noting here is the difference in points of emphasis. The majority stressed the fact that the decedent’s representative had requested, but was not provided, the entire contract. The dissent, in contrast, highlighted the fact that the decedent’s representative could have “walked away” from the contract but did not. (Slip op. (dissent) at 7 (asserting that the decedent’s representative could “have refused to sign the Arbitration Agreement without jeopardizing her mother’s admission to the Facility.”)).

This disagreement raises some tough questions, namely: who should bear the burden where, as occurred here, it is apparent that “additional” terms to a contract exist, the signer requests those terms but is not provided them, but the signer executes the contract anyway? Should the signer be held liable under a duty-to-read-type principle (as the dissent concluded)? Or should the drafter of the agreement be held liable under a construe-the-agreement-against-the-drafter-type principle (as the majority concluded)?

Reasonable minds can differ on these questions—and that’s what happened here. The majority placed the burden on the defendant-drafters of the agreement, while the dissent placed the burden on the signing party.

A final point to consider is whether the outcome might have been different had the signing party been, for example, a sophisticated commercial entity (instead of an individual like the decedent’s representative).  A snippet from the majority indicates that the result in that situation might in fact be different. (See slip op. at 9-10 (quoting the trial court’s conclusion that that the “Defendants’ use of the terms ‘jury trial’ and ‘bench trial’ within the same sentence [of the admission agreement’s signature page] would not give a reasonable person notice of arbitration and would not be understood by someone who does not have training in the interpretation of legal documents”)).

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